Hours of lawyer work done outside compared to dollars spent outside

Avert your eyes if math makes you break out.

An article summarizing data from 102 Canadian law departments, published in Canadian Lawyer, May 2005 at 35, states that the departments “estimate that they will farm out an average of 32 percent of their work to outside counsel this year.” Let’s assume that means a third of the total lawyer hours of work for their companies is done by external lawyers.

A blended outside-lawyer hour typically exceeds the fully-loaded inside lawyers’ cost by about 40 percent (See my post of Oct. 18, 2005 explaining this calculation.). Assuming that metric holds north of the border, the Canadian law departments paid 140 percent times their in-house cost for the 33 percent of external hours.

Stir in a third metric. In the US, the typical ratio of inside law department spend to outside counsel spend is 40/60. We are probably in the ballpark to migrate that ratio to Canadian departments.

Do these numbers hang together? Let’s take a five-lawyer department, with each lawyer turning in 1,800 billable hours. If those 9,000 total hours (5 * 1,800) make up two-thirds of the total, then outside counsel handle 3,000 hours. If the inside hours cost the company $1,350,000 CDN (9,000 * $150) and the outside hours – at $210 CDN because of the 40% boost – cost $630,000 (3,000 * $210), then the ratio of inside to outside is way off: 70/30.

What the Canadian departments might have been saying was the 32 percent of their total legal spent went to external counsel. If so, the laborious calculation, based on several assumptions, matches almost perfectly.